Ingevity Corporation Common Stock

Greetings and welcome to Ingevity's fourth quarter and year-end earnings webcast and conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Jack Maher, Senior Vice President, Public Affairs and Investor Relations. Please go ahead, sir.

Thank you, Brock. Good morning, everyone. Welcome to Ingevity's fourth quarter and full year 2020 earnings conference call. Earlier this morning, we posted a presentation onto the investors section of our website. If you haven't already done so, I would encourage you to download this file so you can follow along during the call. You can find it by visiting ir.engevity.com under Events and Presentations. For participants who are logged into our webcast, the slides should be visible in the online viewing pane and also available to download. On slide number two of that deck, you'll see our disclaimer that today's earnings call may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and in our SEC filings, including our Form 10-K and our most recent Form 10-Q. Injevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements made during this call or to up-reflect events or circumstances occurring after the date of this call. Throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for, comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures are included in our earnings release and can be found on the investor relations section of our website. Our agenda is on slide three. With me today are John Fortson, President and CEO and interim CFO, Mike Smith, President of Performance Chemicals, Ed Woodcock, President of Performance Materials, Eric Ripple, Chief Growth and Innovation Officer, and Bill Hamilton, Vice President, Financial Planning and Analysis and Treasurer. First, John will comment on the highlights of the quarter and full year. Mike and Ed will review the performance of our two segments. John will review some key accomplishments in 2020 and discuss our Ingevity 2.0 strategy. Eric will provide an update on some focus areas for growth and innovation. Phil will comment on our current financial status. Lastly, John will review our 2021 outlook and guidance. With that, I'll turn the call over to our CEO, John Fortson.

Thanks, Jack, and good morning, everyone. Thank you for joining us. We appreciate your continued interest in Ingevity. If you turn to slide four, you'll note some highlights for the quarter. Overall, we delivered excellent fourth quarter and full year results. Our businesses were resilient despite challenging conditions. Revenues in the fourth quarter were $326 million, up 7% when compared to the previous year's quarter, despite the continued economic impacts of COVID-19. Vengevity's fourth quarter results were driven by strong automotive production and sales in China, and a highly favorable truck and SUV ship in the U.S. and Canada. We also benefited from increases in sales for engineered polymers and slight growth in North American paving sales. These positives were partially offset by reduced revenues in the oil field and printing markets and international paving sales, all of which were highly affected by the COVID weakened economic environment. With respect to earnings, adjusted EBITDA were $111 million, up almost 22% from the previous year's quarter. We continue to benefit from the mid-year cost reduction actions that we put in place. Our margins are holding up well across the board, and as a result, our adjusted EBITDA margin for the fourth quarter rose to 34%, which is a fourth quarter record. For the quarter, we generated a low of $122 million due to our strong operating performance and excellent work in capital management. This enabled us to reduce our leverage to 2.45 times, which returns us to our targeted range of between two and two and a half times. I want to thank everyone on the Ingevity team for all their work over the last year as we navigated the ups and downs in both of our segments, especially our manufacturing employees. They have figured out how to work productively despite the constraints of operating in a COVID-safe environment. Our performance this quarter is a testament to the efforts of these employees across the company.

If you turn to slide five, you'll see the fourth quarter results for performance chemicals.

And at this point, I'll turn the call over to Mike Smith. Mike?

Thanks, John. Our performance chemical segment continues to be impacted by a weakened economic environment due to COVID-19. In the fourth quarter, however, we drove improved results for engineered polymers and benefited from solid global paving activity. Double down slightly was still robust given the circumstances. Overall, segment sales in the third quarter were $165 million, down almost 6% versus prior year period. As I mentioned, sales to pavement technology applications were slightly lower than the prior year, and what is essentially a slower period. Paving in North America was up slightly, while sales in China, Latin America, and Europe were down modestly. Sales for energy or polymers products were up more than 10%, to improve demand in industrial equipment, bioplastics, and automotive applications. Sales decreased in industrial specialties applications due to continued demand weakness for printing inks and other end-use applications such as rubber and sterols. This was partially offset by strengthening volumes for rosin products and adhesives in paper chemicals and improved pricing for tall oil fatty acids. We are encouraged that the Chinese gum rosin export price has increased over 25% during the last three months, a positive signal of improving supply-demand dynamics. Also, we continue to see positive potential in our agricultural chemicals business dynamics, where our all-to-stick and all-to-solve technologies for sustainable agricultural applications are progressing and are in field-stage trials with a number of our major customers. We also made strong progress converting our ink customers to new, highly sustainable products which are phenol and formaldehyde free. In 2020, these products represented 25% of our sales in inks from essentially zero in the prior year. Additionally, sales to oil field technology customers continue to reflect weakness in North American drilling activity. According to Baker Hughes, the North American rig count at the end of the fourth quarter was down 56% versus the fourth quarter in 2019. That said, we continue to see winds in China and the Middle East as we work to diversify the geography of this business. Performance chemicals segment EBITDA in the fourth quarter were $27 million, down 18% versus the prior year quarter due to lower volumes and price mix. This was partially offset by improved plant throughput and some foreign currency exchange benefits. We continue to control costs and generate a good mix of our higher profitability products, which resulted in our adjusted EBITDA margin holding respectively at 16% in the fourth quarter and 21% for the full year. With that, I'll turn the call over to Ed Woodcock to review the results for performance materials.

Thanks, Mike. As you can see on slide six, revenues for the segment were a record, up 25% at $161 million. Thank you for joining us today. OEMs face the ongoing struggle compounded by the global semiconductor chip shortage to refill dealer lots and we estimate this will continue into the second quarter of 2021. In the fourth quarter, North American vehicle production was essentially flat with a 1% increase and sales in the U.S. and Canada slightly declined by 2%. The U.S. and Canada vehicle mix of light duty trucks and SUVs versus cars continues to rise and hit a monthly record of 79% in December. This truck SUV vehicle mix has trended high since April of 2020 and is favorable as these vehicles typically have larger canisters and multiple honeycombs as part of their evaporative emissions control systems. This contributed to strong demand for our honeycomb scrubbers used to meet regulatory standards in the US and Canada. The team at our Waynesboro, Georgia facility continues to work hard, and in response, they set new quarterly production and sales records for honeycombs. In addition, we also set a quarterly sales volume record for our activated carbon products. Production and sales of vehicles in China continue to post monthly year-over-year increases since May 2020, The sum of data available for October and November shows vehicle production and sales both up 9% and 11% respectively. December data has yet to be posted. The team at our Zhuhai facility also set a monthly production record in December. While there is no production data yet available for Europe in the fourth quarter, quarterly sales in the region were down 4%. We expect activity in Europe to continue to slow slightly. Segment EBITDA were $84 million, almost 44% versus the prior year period. Segment EBITDA margin increased 670 basis points to 53%. We saw record volumes across the segment that leveraged our low variable cost structure and in addition benefited from a strong price mix improvement and reduced legal expenses to defend our intellectual property. In October, we completed a kiln replacement outage at our Covington, Virginia facility, seven days ahead of schedule. This completes the last of four kiln replacements at that facility. Also during the fourth quarter, we completed a capacity expansion project at our Zhuhai China plant following significant debottlenecking and equipment upgrades. These upgrades have effectively increased production capacity by an additional 15 to 20 percent, helping us to meet the high global demand for our premium, high capacity pelletized carbon products in that country. At this point, I'll turn the call back to John. Thanks, Ed.

If you turn to slide seven, I'd like to take a moment to highlight Ingevity's accomplishments in 2020. We are proud of what we got done this year. Besides our strong financial results, we have moved quickly to develop the longevity of the future, and our work is just getting started. Throughout the course of the year, we reduced costs, placed greater emphasis on organic growth and innovation, and generated revenues that were 92% of our initial pre-COVID guidance, and adjusted EBITDA that were 97% of our initial pre-COVID guidance. We ended the year with adjusted EBITDA fundamentally even to our 2019 performance and generated outstanding free cash flow of $270 million. Additionally, we were able to take advantage of a favorable interest rate environment by securing an eight-year $550 million bond at a fixed interest rate of 3.875%, while also extending and amending our credit facility. We also bought back an impressive $88 million in shares. And as I mentioned earlier, this brings us back to our target in net debt ratio. Both of our business segments delivered solid performance in a tumultuous year. Our performance chemical segment delivered mixed results in the face of COVID weakened demand, but was bolstered overall by sales to pavement technology customers in North America and overseas. We drove expanded sales of engineered polymers into bioplastics. and successfully completed the monomer production glassware replacement project at our Warrington, UK facility. Our performance materials segment delivered yet another year of record revenue and earnings as the team adapted to the strong decline and then snapped back in global automotive production. I can tell you from first-hand experience, the team at Waynesboro was working very hard to meet incredible demand. Our teams in Covington and Zuhai did great work in completing the necessary capital projects at those facilities. We continue to be very optimistic about the long-term potential for our performance materials segment. Recent estimates and proclamations pertaining to the term electric vehicles have created a lot of confusion around the growth rate of battery electric vehicles. The term electric vehicles typically includes full battery electric vehicles and plug-in hybrid electric vehicles. Full hybrid vehicles and plug-in hybrid electric vehicles both use internal combustion engines. And hybrid growth is exceeding that of pure battery electrics. In 2020 in Europe, adoption of hybrids outpaced registrations of pure battery electric vehicles at end of the year with a market share almost three times that of pure battery electric vehicles. And in China, as part of their new electric vehicle or NEV requirements, they are emphasizing greater use of low fuel consumption vehicles, which are hybrids, to lessen an OEM's NEV credit quotient, thus allowing the OEMs to reduce their focus on battery electric vehicles in favor of hybrids. As we study IHS and other data sources, we remain convinced we have a long runway for further growth, both from our legacy automotive products, but also from other applications. And as Eric will discuss in a minute, We are committed to maximizing the potential of all applications for our carbon and high growth, high margin products. We rolled out Ingevity 2.0, an organic growth strategy. With this re-energized approach to our vision and strategy, we'll place greater emphasis on sustainability, customer centricity, and innovation, and expect over time to significantly increase our revenues as a result. We continue to make progress in developing and commercializing our absorbed natural gas or AMG technology. We are continuing to work collaboratively with natural gas utilities, OEMs, and other partners to validate this technology for light and medium duty trucks for which batteries are constrained. We are developing the reuse of renewable natural gas or RNG with this system as a way of even further enhancing its environmental benefits. and, as the recent announcement from Amazon that they are purchasing an increasing number of natural gas trucks indicates, fleet owners represent a part of the market where our AMG technology can play a role. Lastly, we also continue to make significant strides in the implementation of our inclusion and diversity and sustainability programs. We published our first two reports outlining the greenhouse gas reduction benefits of our Neutrar and Evotherm products. proudly maintained our silver rating from Echobotis and moved into the 70th percentile in the Dow Jones Sustainability Index, all while continuing to better position ourselves to leverage the increasing importance of sustainability on a global level to drive organic growth into the future. Turning to slide eight, I'd like to take a closer look at what Ingevity 2.0 will look like in 2021 and beyond. In particular, how we will grow our enterprise and drive business excellence to maximize value and drive to increase profitability. Our enterprise will grow by focusing on what we call the Big Six initiatives that Eric will discuss next. First, we have an eye towards leveraging our activated carbon expertise beyond the automotive industry and to other high margin performance material markets. With the commercialization of our A&G technology for light duty trucks, We've already begun to leverage our long history and strong technical expertise in the capture and release of automotive vapors. We are leveraging this expertise further to provide innovative absorption technologies in areas such as the capture, storage, and transportation of biomethane. Additionally, we are looking at human health applications like antimicrobials, antivirals, and time-release drug delivery. We are also focused on the use of alternative feedstocks in our refineries to optimize our manufacturing assets, diversify our raw materials sources beyond CTO, and expand our products into new derivatives in adjacent end markets. One of these markets is biofuels, which is expected to continue to grow rapidly. Eric will provide more detail on both of these initiatives. We are testing alternate materials now. Third, we remain committed to exploring and expanding the use of our rosins in diverse end markets, such as adhesives, and other polymeric applications. Additionally, we plan to drive continued growth in engineered polymers. In addition to our focus on derivatized high margin products, we will capitalize on favorable trends and market needs where our Kappa solutions are uniquely suited to solve customer challenges. One such trend is the growing need for biodegradable compostable plastic products where our Kappa thermoplastics enable plastic bags and utensils to break down fully into carbon dioxide and water and be composted at home or in an industrial facility. In fact, our revenues from these products have doubled over each of the last two years. We will continue to focus on growth in this application. I am encouraged by what we are seeing from Engineer Polymers, both in the fourth quarter, but also as we have begun 2021. We continue to believe that as our customers work to decrease their carbon footprints, we have a differentiated opportunity to problem solve with our chemistry. Our initiative to evaluate the societal benefit of our significant product lines by 2022 is well underway. And we have also begun to embark on an aggressive certification program aimed at recognizing the renewable nature of our products by third-party experts. Lastly, we will keep working steadily to become a truly global brand by increasing our international sales and strategically maximizing our presence worldwide. Particular opportunities exist in the pavement, oil field, and agricultural chemicals markets. Increasing our presence overseas is just beginning. We intend to remain a top quartile specialty chemical company as measured by EBITDA margin and rolling. To this end, we will continue our commitment to driving increased efficiency and customer experience. Our SAP S4 digital transformation continues to progress on track. We also continue to benefit from the focused efforts of our supply chain team to optimize logistics, reduce expenses, and streamline operations. As we begin 2021, these efforts have been critical. Our capital allocation strategy will focus on a balance of growth investments, debt reduction, and opportunistic share repurchases. We have returned to our target in that debt range, which provides us additional flexibility, and we will continue to take a disciplined approach to capital allocations. Our repurchases in the fourth quarter should indicate that we will buy shares at values we find attractive. I will now turn the call over to Eric to discuss More specifically, some of our growth initiatives in more detail.

Thanks, John, and good morning. On slide 9, I'd like to provide an update on some focus areas for our growth and innovation team that will help drive value as part of Ingevity 2.0. As John mentioned earlier, one of the three main drivers behind the re-energized approach to our strategy is a focused approach to innovation. To this end, we have established a dedicated growth and innovation team to lead this effort and today are pleased to highlight the initiatives developed over the last several months. To expand the use of our activated carbon, we are primarily interested in the areas of biomethane and human health. In the emerging field of biomethane and renewable natural gas, or RNG, we see opportunities to further leverage our activated carbon expertise. We believe we can provide innovative, absorptive technologies that capture biomethane from landfills, municipal wastewater treatment facilities, and agriculture farms by handling the purification, storage, and transport of bulk gas. We are developing external relationships to participate in unique business models that will further drive growth for Ingevity. Next, the field of human health provides some attractive entry points for Ingevity including adding surface functionality to our carbon technologies, leveraging emerging chemistries that mitigate bacteria and viruses like COVID-19 and medical applications and timed release drug delivery. Our activated carbon technology is already being used commercially as a critical input into airborne COVID killing applications. In order to drive expanded uses of our legacy CTO and optimize our manufacturing facilities, We will focus on the areas of alternative feedstocks and biofuels. Today, soy and tallow are just two of the alternative feedstocks we are evaluating and have completed extensive testing in our plants to better understand where the most attractive market opportunities exist for longevity. Lastly, our CTO chemistry positions us well to participate in the global transition from fossil fuels to more sustainable biofuels like renewable diesel. This fast-growing segment has a full range of options for Ingevity, including selling Ingevity products as feedstocks or leveraging our manufacturing capabilities to upgrade other suitable fuel precursors. Here, we've also developed external partnerships to explore other innovative business models in which we can participate and or invest. As you can see, we've built a diverse and robust pipeline of opportunities that will form the foundation of our future growth. We look forward to continuing to provide regular updates on our progress and the impact of our efforts. I'll now turn the call over to Bill Hamilton to discuss our financial position.

Thanks, Eric. I'll now briefly discuss our financial summary, which you'll find on slide 10. Before I dive into the numbers, I'd like to draw attention to the overall strength of our financial position. A healthy summary you see on this slide has been achieved with purposeful execution and clearly reflects The numerous efforts our team made in 2020. The fact that we were able to return to our targeted net debt levels less than 24 months after the CAPA acquisition is a testament to our ability to generate strong cash flow, even amidst a challenging economic environment. Our borrowing rate at the end of the quarter for our revolver and our term loan was LIBOR plus 150 basis points. The rate on the senior notes issued in October 2020 in January 2018 remains fixed at 3.875 and 4.5% respectively. And the $80 million industrial revenue bond borrowing rate remains fixed at 7.67%. The resultant weighted average interest rate was approximately 3.2%. Net debt as of December 31st was $974.8 million. Our net debt ratio was 2.45 times, which is down from the third quarter, when it was 2.73 times. Trade working capital for the quarter decreased sharply from the previous sequential quarter to 233 million, which is 19% of sales. While our working capital typically spikes during the first half of the year, as we prepare for paving season, we remain focused on maintaining optimal working capital moving forward. As we stated earlier in 2020, will continue to be opportunistic for share repurchases. In the quarter, we repurchased 60 million of shares, bringing our total 2020 repurchases to 88 million. We have 407.6 million remaining on our current share repurchase authorization. Additional information will be available in our Form 10-K, which we expect to file next week. I'll now turn the call back over to John.

Thanks, Bill. On slide 11, I'd like to review our guidance and outlook for 2021. We've announced our fiscal year 2021 guidance for sales between $1.25 and $1.3 billion and adjusted EBITDA between $400 and $420 million. Our guidance reflects growth versus 2020's performance despite continued economic pressure from COVID-19 and the uncertainty around potential impacts on global trade due to tightness across transportation modes worldwide. While the business environment feels pretty good as we speak today, a lot of uncertainty remains. On the performance chemical side, we anticipate improved conditions for merchant rosin. These will be slightly offset by weakness in printing and paper chemicals. We also expect growth in agricultural chemical dispersant. We should benefit from moderate growth in demand for pavement technologies based on strong paving project backlogs and continued evotherm warm mix technology adoption. In engineered polymers, we expect increased demand for thermoplastics. And lastly, we do expect to see continued weakness in the oil field industry. For performance materials, we expect the segment to deliver double-digit revenue growth despite the absence of any significant regulatory standards being adopted globally. This growth will occur largely due to continued industry efforts to refill the vehicle inventory pipeline. We are watching the semiconductor situation in the auto industry closely. Based on the most recent data, we expect about a 5% impact to global auto production in the first quarter as a result of the chip shortage. This would translate to an impact of $5 to $10 million in revenue to Ingevity, which we expect to make up in the back half of the year. To the extent our perspective changes, we will adjust as necessary. We expect demand for trucks and SUVs to continue to expand, and our litigation spend will be as expected at around $15 million for the year. In terms of capital expenditures, we plan to spend between $100 and $120 million. Major capital projects in 2021 include the continued expansion of our Covington, Virginia, activated carbon facility, the SAP S4 HANA Digital Transformation Project, and an increase in growth and innovation capital. With the increase in capital spending and stabilized working capital levels, we expect free cash flow for the year to be at or above $200 million. We also expect to keep our net debt to adjust at EBITDA ratio to between two and two and a half times, absent any acquisition. Overall, we will deliver strong results in 2021, despite the challenging global macroeconomic conditions and increased capital expenditures. In 2020, we demonstrated our ability to be flexible and drive performance through consistent execution amidst great uncertainty. And we will continue this in 2021. We believe deeply in the strength of our reenergized Ingevity 2.0 and our team's ability to execute on the opportunities ahead. These continue to be unprecedented times from a business standpoint, yet we are incredibly pleased with our performance in the fourth quarter and for the year. Given our track record of both maintaining and meeting guidance, we remain both optimistic about the year and confident in our guidance for 2021. We also believe we're well positioned for value creation in the long term. As a market-leading global specialty chemicals company, we continue to leverage our technical expertise to the benefit of our customers. Combined with a strong balance sheet and experienced management team, we believe in the soundness of our strategy and our ability to execute on the opportunities in front of us. Before we end the call, I'm pleased to share that we are in the midst of preparing another webinar series for the first half of 2021. We will provide additional information on the topics and timing in the coming months, so expect more to come. In closing, I appreciate the work and efforts of our 1,750 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long-term potential for our company, and we hope you share our enthusiasm for longevity. At this point, operator, we'll open the call to questions.

Thank you. At this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question today comes from John McNulty of BMO Capital Markets. Please proceed with your question.

Yeah, good morning. Thanks for taking my question, and congratulations on some really, really solid numbers. So I guess the first question would just be on the guide for the performance chemicals business. I mean, it looks like you're looking for EBITDA to kind of be flat to upish is what you're indicating it. When you look at all the positives and negatives, it certainly looks like there's more in the positive camp with at least merchant pricing starting to push higher. It sounds like some of the derivative pricing may be starting to follow that as well. And then you have a handful of end markets that will be better and only offset by a couple that maybe get marginally worse. So I guess, is there something else that we're missing on that, whether it's raw materials or something else that we should be thinking about that gives kind of that It gives a little more credence to the conservative guide.

I appreciate it. Thanks for the question. We are taking a conservative posture sitting here. As I said in the prepared remarks, it feels pretty good sitting here today, but we do think we're going to see some raw material pricing pressure across a lot of different parts of our businesses. We are seeing freight problems, right? Like a lot of industrial companies, we are stuck up in sort of the global transportation freeze that's occurring. So we're optimistic, but I think we want to be balanced. We're sitting here in February. Everyone knows what sort of played out last year. While we don't expect a big COVID resurgence, we think it's going to take a little while to kind of work through the spin back up, right? So Feels good, but we'll see how it plays out.

Got it. Fair enough. And then I guess a question on the performance material side. I think in the release around your guidance, you know, there was a comment, you know, we expect to kind of see margins get back to more normal levels. You know, admittedly, this is a pretty volatile business when it comes to the margins, and we've seen them push higher because of increased content, et cetera. I guess what do you view as a normal situation? All right.

I mean, look, as we tried to allude to in our remarks, I mean, if there's one thing 2020 showed, it showed what this company can do when it's under pressure, right, due to, you know, macro issues that are kind of beyond its control. Ultimately, we were able to really crack down on working capital. We were able to run the company and the business with extreme levels of efficiency that candidly is not something that you can do on an ongoing basis, right? As the business returns to more normalized levels, you know, we think those margins will come down into the mid-40s, which is more appropriate for what we would describe as long-term margins for that business, right? But I don't want to take away from the achievements, and I know investors are always forward-looking, but it does show you what this company can do when it's under pressure. And we're very proud of that performance. But as we go forward, we're going to have to operate the business in a more normalized manner and get back to growth investing and expanding working capital to meet customer needs, et cetera. I mean, we've got – we can't – Our inventories are in a very tight position, and we'd like to have a little more cushion, given our position in the auto chain.

Got it. No, it makes sense. Maybe I can squeeze one last one in, too. On the Ingevity 2.0 growth initiatives, first of all, it was helpful in walking through the four big ones that you guys are excited about. Does one stand out to you? as being closer to commercialization. And I guess, can you help to frame maybe the one that you're the most excited about right now?

Well, go ahead, Eric. Yeah, I would say the one on biomethane and renewable natural gas is the one that we're most excited about and the one that we're closest to on commercialization. For a lot of reasons, we like it because it fits with our activated carbon business and provides a really good point of leverage to get into that industry.

But I would tell you too, John, I'm also really excited about the work that's being done on the performance chemical side with regards to alternate feedstocks, right? I mean, this is a business that has been through a lot the last few years, as you guys know. It has historically been very leveraged to sort of one very, very, very critical raw material that we fortunately have locked up in long-term supply agreements, but The work that they're doing to diversify our feedstocks to drive utilization of our facilities will also move into new products that will be developed as well as the ability to reformulate some of our current products. It's pretty exciting stuff and there were a lot of smiling faces around here earlier this week because we had some successes in that. Both of those initiatives I think are Stay tuned. You're going to hear more from us. I don't want to overpromise as to when and how this will uptake, but we feel like we're making progress and moving forward.

Great. Thanks very much for the caller.

The next question is from Ian Cefino of Oppenheimer. Please proceed with your question.

Hi. I kind of maybe wanted to build upon that last question. On the AMG side, You know, how are the pilots going? Any kind of new news to report on additional fleets that the A&G has been adopted in? And what should we expect from that business?

Yeah, Ian, this is Ed. Great question. A little early for us to be talking about the opportunities that are going to come through. I think that'll be a Q2 or Q1 coverage for us. We've got a number of irons in the fire. The one that I can talk about is our own fleet that we have that we use as demonstration vehicles around the US. And that we have basically converted them to the use of RNG, renewable natural gas. And that is the only fuel that has a negative carbon intensity. and we feel that that's a great pathway in combination with our A&G vehicles to continue to grow that platform.

Okay, thanks. And then I guess the other question would be as far as shipments and what you're seeing on the OEM side, inventories are very, very low at the OEMs right now. Is there a push to ship more or is this going to be, you know, there's going to be more restocking on their end or are we just sort of in line and your shipments are in line with just vehicle production? Just trying to get a sense of what happens there. Thanks.

Yeah, as John talked about, we do expect to see some impact in Q1 and maybe some in Q2. You know, obviously all the OEMs and their suppliers are working hard to get as many chips as they can. I'm not sure whether you saw the GM press release. There was an interesting component to it in that they are producing vehicles without the chips and then storing the vehicles and then adding in the chips as they come in. So that's demand for us that is being put on the vehicles even though they're not completed finished. So I would expect to see that at some other OEMs as well so that they can optimize their production and start refilling the vehicle pipeline. versus solely stopping production of vehicles.

To some extent, Ian, this is helpful from an operational perspective because we need the time to get our sort of inventory replenished internally, right? We were running really, really tight. But the point is you're probably going to see a little bit of disconnect between sort of our production and what auto production actually is recorded as in Q1.

Okay, great. Thank you very much.

The next question is from Vincent Anderson of Stifel. Please proceed with your question.

Yeah, thanks and good morning. So a lot of interesting things in here to unpack. You know, when you start stacking up the amount of bio and renewable diesel capacity coming online in the U.S. and what it's doing to vegetable oil prices, I'm definitely inclined to agree that it looks like we could see a gap in feedstock availability sooner than later. have you already started to have discussions with potential customers that want to get TOFA certified as a feedstock for RIN generation, getting a carbon intensity score calculated for the California carbon credits, or are we not really that far along yet?

Yeah, we're absolutely having those conversations with several customers.

And just to add on the comment on TOFA, we have our facilities registered and certified to supply into the biofuel market in Europe. So we believe over time that that's going to be an increasingly valuable outlet for biofuels, and that will become part of our sort of TOFA end market application focus.

Excellent. Thank you. And when you think about the economics there, It's tough to pin down exactly where TOFA pricing is, but as you stack it up against biodiesel feedstock prices at their current levels, if you could sell into that market today, would it be a positive mix impact or is this kind of getting out ahead of where the market might be going in the future?

So at this point, it's not a really significant positive mix impact for us for TOFA when it comes from a pricing standpoint. But if we look out the next year or two, we believe that that demand increase will probably move the needle such that we'll be moving some of our TOFA over to into that market compared to some other export opportunities that we currently serve in the industrial space.

Excellent. If I could sneak one on just following that chain of thought. When you reference low carbon intensity alternative feedstocks, I think you mentioned some existing biodiesel feedstocks, but are there more opportunities left in the pulp value chain, like additional lignin processing or maybe getting into stump processing?

As far as lignin goes on the pulp side, it's not really an area that we're putting much focus on. there is potential and always some technology for pyrolysis that could eventually feed that market but that's not really something that we're putting a lot of current focus on. We think that there are some better options that suit both our assets and our technology as well as sort of the end market and derivatization that our plant assets and our technology team can provide.

Excellent. Thank you very much.

The next question is from John Tanwantang of CJS Securities. Please proceed with your question.

Good morning, gentlemen. Great, great quarter, and thank you for taking my question. My first one is, can you give an update on the competitive environment in the materials business and whatever, you know, maybe an update on the legal avenues you're taking in that business given the deep patent situation that you're in?

Yeah, the competitive environment is roughly the same as it has been for the past couple years. Obviously, we have a legal issue with BASF relative to their entrance into the marketplace with competing technology. Outside of that, we do have a competitor in China, but at the end of the day, that's kind of the lay of the land for competitors that we see in the auto sector.

Okay, great. Maybe a question for John. Now that your leverage is down to your target level, is there a preference for share repurchases or M&A? And if it's the latter, how do you see that playing out? Are you actively engaged? Are there a lot of targets of opportunity out there?

Well, it certainly gives us a lot of flexibility, right? My own view, John, is I don't see these things as mutually exclusive. I think we have the ability to Thank you. Thank you. You know, you flash forward to where we were a year ago or flash backwards a year ago, there was a lot of concern around our leverage and the timing of the cap acquisition, et cetera. And we feel like as a company, we have put that behind us and we are back in a position to be offensive in terms of growing the business and maximizing value.

Got it. If I could go back to the carpet subject just one more time. Can you just give us an indication of how much content you have in a dollar terms that maybe an SUV has or a hybrid has these days or maybe even a hybrid SUV and kind of how that plays into what you're seeing in terms of growth and units for the future?

Yeah, this is Ed. It's really determined on the region. So if you think of a European content for us, think of it as maybe $3 a content on a vehicle. China with larger canisters and some use of additional scrubbers, you're looking at a cost or content level of $6 to $8 a content. And in the U.S., it's a big spread somewhere between $15 and $35 a vehicle.

We like big trucks. Got it. Thank you very much, guys.

All right.

The next question is from Daniel Rizzo of Jefferies.

Please proceed with your question. Good morning, guys. You mentioned that there's a 25% price improvement in Chinese gun rosin and said it was because of supply-demand favorability. I was just wondering if that's because supply is being reduced by the Chinese or it's just a rebound in demand during what is economic recovery.

Yeah, it's primarily a reduction in supply in China. They had a lot of inventory built up. That inventory has now been worked out of the system. And in Chinese, overall supply and production of gum rosin has gone down. So we've got, I'd say, reasonably steady and maybe modestly improving demand, but supply that is now coming much more in line with that, which is... tightening up the market, making it more in balance, and getting that price rebound to a more acceptable level.

Okay. Okay. And then on the litigation surrounding your intellectual property, I was just wondering if you could provide color. I mean, how far are we from a resolution? Is it still years away?

Yeah, we've got easily another year to go with the various aspects of our suits and legal issues. So I wouldn't expect it to be resolved until, let's say, late in early Q1 2022. All right.

Thank you very much.

The next question is from Mike Sison of Wells Fargo. Please proceed with your question.

Hi, this is Richard for Mike. First question is on performance materials, double-digit revenue growth for this coming year. I was just wondering how much of that is from volume improvement versus price, and also just have you incorporated your expectations on higher hybrid demand into that or lower EV demand into that as well?

Yeah, for this year I don't think any impact for EVs is going to materially affect the business. from a you know from a price mix standpoint we historically continue to put price in every year and we'll continue to do that this year. Volume is going to be favorable if you think of all the volume that was lost globally in Q2 or early Q1 if it was China that was lost over the year that volume should return. Obviously some muted impact with the global chip issue but The OEMs are still in a position of having very little inventory on dealer lots and need to start refilling those dealer lots. So, you know, we do feel that we'll have a good year-over-year increase on an annual basis of vehicles produced.

Great. And then my follow-up on the renewables initiatives, you know, how much of the CapEx this year is towards renewables? that if any any R&D expense increase and then in terms of incorporating that into your mix are you going to have to retrofit existing plants or is this going to use existing manufacturing facilities?

Well the goal is to use existing manufacturing facilities as much as possible. I mean I think it would be you know we're not going to be shy in terms of Investing in those facilities if we believe that we can get an appropriate return, but obviously that's more favorable than either doing something greenfield or doing an M&A type of strategy to enter these markets, right? So we're going to do it the most capital efficient way. I mean, I would tell you that when you kind of look at our CapEx guide, and it's going to be variable depending on whether some of these investments sort of materialize over the course of the year, but You could expect that we're going to spend maybe $20 million of that on what I would call sort of growth capital oriented around these initiatives. Could be a little higher, could be a little lower. I mean, some of it is related to we're not going to spend it until it's the right time to spend it, and we're not going to spend it unless it's the right thing to do.

Sounds good. Thank you.

The next question is from Paritosh Misra of Barenburg. Please proceed with your question.

Thank you. Good morning. Can you provide some more color on your activated carbon applications and carbon capture technology? Specifically, what kind of changes you might need to make to this existing activated carbon product that you're selling to the automotive industry? Is there any different specifications such as the butane working capacity or is that a different process or pretty much the same?

That's one of the attractive features of this opportunity is we don't have to change the activated carbon that we're using for capturing renewable gas. The aspect that's really important that applies to our automobile business as well is that our carbon is a catch-and-release carbon, so it can be used over and over again and not be thrown away where other carbons like coconut or coal-based carbon we call catch-and-throw-away Thank you. Very interesting.

and then as a follow-up in your pine chemicals business, sorry if I missed that, but what's the reason for wanting to reduce reliance on CTO as feedstock? Is that because you think CTO prices will go higher? And will you need to make adjustments to your biorefinery to take these alternative feedstocks?

Well, look, the answer is we have a remarkable amount of capability with our current Thank you for joining us. CTO more broadly. There's a finite number of suppliers that come from an industry, the pulping industry that is effectively a GDP plus industry. So we've always felt that this diversification could make some sense for us just because you don't want to be so reliant. But we actually now feel like we have a real business opportunity because of what's going on with Biofuels, and the use of other feedstocks of a renewable nature. There's real opportunities for us. We have a company full of great, smart, hardworking engineers at all of our facilities, and we have an opportunity to sell other or grow our product portfolio, if you will, by having these different feedstocks. And we can also reformulate some of our products and give ourselves some De-risking the CTO, I guess, right?

Right. Thanks, John, and looking forward to learning more on some of these interesting initiatives this year. Thank you.

Yeah, thank you.

The next question is from Chris Kapsch of Loop Capital Markets. Please proceed with your question.

Yeah, good morning. Thanks for taking my question. I'm curious about the traction you're getting on the SOFA price increases. Is there any way you could elaborate on the magnitude of success there? And really more curious about the extent you're getting pricing. I'm curious about is it a function of tight TOFA supply demand conditions? Because obviously you have this backdrop of oil fields, which is one key outlet for the TOFA being so weak. So is the supply demand tight? to support the pricing. And if that's the case, is it a function of just the industry ratcheting back on its utilization rates that's diminishing the supply? Or are you starting to see, maybe not in your system, but from other players, some movement on this demand for TOFA for the biodiesel in Europe?

Yeah, thanks, Chris. So we've got traction on TOFA pricing, and I would say that... Thank you. Thank you. having an opportunity to compete in industrial export markets where alternative vegetable oils pricing has gone up quite significantly. And some of those markets, such as overseas coatings markets that have the ability to change between fatty acids, we're taking advantage of utilizing TOFA to do that and increase price accordingly versus other fatty acid subsidies.

Got it. So based on that, it sounds like you have some headroom based on what some alternatives, the pricing for some alternatives to TOPA. Does that also provide an opportunity to place more volume if you were to crank up the utilization rates at your refineries a bit or not so much? Thank you.

Yeah. Well, as I think we generally have discussed previously, we focus our Thank you for joining us. and some of the profitable straight TOPA markets. And lastly, some of the overseas industrial markets that substitute between other different fatty acids.

Totally makes sense. And I guess that with that idea then the opportunity to come up with additional TOR and markets as part of your, you know, the growth initiative Thank you very much. We are always seeking to promote our TOR and demand in lots of different applications. We think that there is an ongoing opportunity as a sustainable

Substitute for hydrocarbon-based products, especially in adhesives. We have actually seen even in some other markets, such as the oil market, the use of products that contain rosin for profits in sand coatings. We're going to continue to push the positive sustainability attributes, whether it be in packaging adhesives, safety road striping versus hydrocarbons, and then seek to broaden applications like we always do for the use of TOR and its derivatives.

Thank you.

The next question is from Vincent Anderson of Stiefel. Please proceed with your question.

Yeah, thanks for humoring me here. I wanted to dig a couple more of the 2.0 comments, specifically on the activated carbon and antimicrobial and pharmaceutical applications. Would this really just serve as a carrier for an active compound? And is this unique to your hardwood carbon? Or can we already kind of go out and find some specialty grades of carbon using these applications today?

Yes, to both of your questions. First, it is acting as a carrier. and secondly, you know, it's about the functionality of our carbon compared to other carbons is what we're trying to leverage in that market.

All right, that's great. And if I could squeeze in something on CAPA, you know, that trailing mix of derivatized product is really quite impressive. I'm just curious if that's on a trailing basis or if that's adjusted for more normalized demand where we might see a larger mix of monomer come back.

We think that the 80% that we've achieved is very sustainable. In fact, if we look at the growth opportunities that we're seeing even as we enter this year, they are much more based on the derivative products. We've got thermoplastics, as we mentioned before, with a very high opportunity for biodegradable bioplastics. and also our polyol products across a broad suite of industrial applications for high functional specialty polyurethane applications are really where we're seeing the positive growth. So I think that that 80% derivatives product portfolio is very solid and in fact over time could accrete even further based on the focus we put on it behind innovation and some of those higher growth areas.

I was going to go back a little bit on the antimicrobial and antiviral. We don't really like to overhype, as you guys probably know, but I will tell you that we are, even as we speak, producing filters that are being used in devices that are going to be sold commercially to as COVID filtration killing devices, right? I mean, I wouldn't characterize them as being hugely material. I wouldn't say they're material to our results right now, but the point is that that's because we're capacity constrained, right? I mean, we are making these things now in Waynesboro, and there's a huge opportunity there, and we'll just sort of flex on Our production as we sort of seek what is the best, highest margin, highest value product. So it's probably a little further along than you guys might necessarily appreciate, but I wouldn't characterize it as material to our results right now.

No, that's helpful. And I told myself that was going to be my last question, but the comments on CAPA teed me up perfectly. One more. I mean, given the success in polyols, right, have you given any thought to maybe just, you know, the balance sheet's looking good, but maybe thinking about bolt-ons and something like a polyurethane system house or two to just pull in a little bit more of that value and, you know, increase, accelerate commercialization even further for the cap of polyols?

So, you know, we are on the lookout for bolt-on acquisitions for the engineered polymer business. whether it involves potentially going downstream or adding sort of adjacent products to engineered polymers in a sort of profitable part of the polyol product mix. Those are on the table. We'll continue to evaluate those opportunities and hope over time that we'll be successful in adding inorganically to that business as well as Thank you everyone for your time and interest this morning. We remain very positive about our long-term business outlook and look forward to talking with you again next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation